Neonode Inc. (NEON) Q4 2018 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for standing by, and welcome to Neonode's Year-end 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. I would like to direct your attention to the accompanying PowerPoint slide deck that you can view when you log on to this call. The company will control the navigation through the slide deck to coincide with their prepared remarks. Thank you. At this time, for opening remarks and introductions, I would like to turn the call over to David Brunton, Neonode's Head of Corporate Investor Relations. David, please go ahead and start the conference.

Welcome, and thank you for joining us. On today's call, we will review our fiscal 2018 fiscal results and provide a corporate update. Our update will include details of customer activities, technology developments and other items of interest. On the call today with us is Hakan Persson, our CEO; and Lars Lindqvist, our CFO. Before turning the call over to Mr. Persson, I'd like to make the following remarks concerning forward-looking statements. All statements in this conference call, other than historical facts, are forward-looking statements. The words anticipate, believe, estimate, expect, tend, will, guides, confidence, targets, projects and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements do not guarantee the future performance that may involve or be subject to risk, uncertainty and other factors that may affect Neonode's business, financial position and other results, which include, but are not limited to, the risk factors and other qualifications contained in Neonode's annual report on 10-K, the quarterly reports on 10-Q and other reports filed by Neonode with the SEC, to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expected or implied by these forward-looking statements. Neonode expressly disclaims any intent or obligation to update these forward-looking statements. At this time, it is my pleasure to turn the call over to Hakan Persson, Chief Executive Officer of Neonode. Hakan, please?

So thank you, David. Good morning, and welcome to our 2018 call. This has been a very busy year for us. I'm going to start with the summary of the financial results, and then move on to a discussion of where we are with the business. In summary, revenues for 2018 decreased 17% year-over-year, driven by decreases in our license fees from automotive and e-readers, AirBar sales, salary fees. On a positive note, our operating expenses decreased 14% and net loss decreased 34%, and cash used by operations decreased 48% year-over-year. So Lars will talk about this in more detail later on in the presentation. During the year, we have spent a lot of time reshaping our business based on customer input and the 4 analyses of where we create real value. Based on this, we have changed our working methodology and processes to become more market focused and customer focused. We have developed a clear business plan where we focused the company and our technology on specific markets and use cases, markets that we believe will provide a solid customer base and a pathway to future growth. There are no shortcuts or easy fixes in the embedded business. And with that said, I'm satisfied with the progress we are making. And we have strengthened our cash position to provide the liquidity necessary to execute on our plan. I believe with the traction we have, we are on the right track to achieve growing revenues and improve results. Our strategy going forward is aimed at capitalizing build on our successful touch interaction business. Here, we will focus on primarily existing but, of course, the new customers with an expanded use case offering. To do this, we will increase our market presence and sales reach and offer solutions for both high- and low-volume product implementations. We have a strong track record with our touch-on display solutions, and we'll use our strong presence to grow our market share and capture growth opportunities for our mid-air interaction and object sensing solutions. Initially, we will focus on specific use cases in automotive entry systems. The automotive market is one of the new technology frontiers and represents a huge market opportunity where we would leverage our existing relationships with Tier 1 and OEMs to gain additional market traction. So let me elaborate on how we capitalize on our market opportunities. For our touch-on display solutions, we have identified specific use cases that allow us to capitalize on our competitive advantages. A robust and feature-rich performance at the competitive overall cost, clear display viewing quality with no screen overlay like use with competing technologies, ability to work in very harsh conditions with no degradation of quality and with low power consumption. In addition, we can be retrofitted into existing products and allow for ease of integration into new products. For basic touch solutions, we are working with customers in our established markets such as printers, e-readers, monitors and automotive IVI systems. The primary driver has been the latest release of a touch-on display license technology and future road map, which has been favorably received by our customers. These markets are growing and we have a track -- strong track record of success. High-quality image and rugged display touch are use cases where our technology is a good fit because the solutions require a clear viewing experience or often operate in harsh conditions where protective gear is needed. Our solutions can be easily implemented and retrofitted into existing products. In addition, the ASP, the average selling price, is generally high, why this is a good business for proposition even at low volumes per individual customer. For mid-air interaction and object sensing, we will initially focus on automotive entry systems. This is a large and growing market. We see a strong interest in replacing existing solutions due to poor performance and lack of user friendliness. We enable a robust, reliable and user-friendly tailgate solution at a competitive cost, applicable for both before and aftermarket implementations. Neonode is already known in the automotive community, and we are leveraging our existing relationships. We are increasing our market presence and sales reach by augmenting internal sales teams with external sales partners like technology-oriented sales reps, firms, selected system integrators and distributors such as Digi-Key Electronics. Our internal sales teams will focus on capturing business with our current customer base and selected key accounts. External sales partners will help us expand our reach into new markets with targeted use cases in defined geographical regions such as the U.S. and Europe. We have increased marketing activities to showcase the capabilities of our technologies. Over the past 3 quarters, we have been building product awareness by attending and demonstrating our solutions at market- and technology-specific trade shows such as BSIDs, Sensor Expo and several other events for both automotive and consumer products. The feedback on these events have been very favorable, providing a good source for our sales fleet generation. We also have a well-thought-through product road map for continuous improvements to reduce overall cost structure, increase our patch on display functionalities, larger screen sizes, gesture object detection, optimized sensors and automotive certification. The latest release of our touch-on display license technology brings significant implementation cost and in functionality improvements. We believe our road map will allow us to increase the appetite for our touch-on mid-air solutions and thereby increase overall addressable market. I will discuss some capital activities that have been recently initiated. Let me start with our printer customers. Two of our customers are currently planning to design several new printer models. We have been meeting with them, and they are fully aware and appreciative of our product road map, and we are discussing design projects for inclusion in the upcoming product lines. To date, our customers have shipped 32 million printers using our touch solutions in 2014. Our e-reader customers, 1 current and 2 prior customers, are in the design process for new lines of e-readers using our latest release. We think it is important that 2 of our prior customers who either left the market completely or changed the competing technologies are coming back to Neonode. They are returning for all the reasons they originally used our touch technologies: speed, no screen glare, low overall power usage and cost effectiveness. 29 million readers have been shared with our technology since 2011. And from one of those, we are in design discussions with the current large OEM customer, who is developing a new interactive display. Since 2013, our customers have shipped 2 million consumer display devices using our touch. There is an increase in design activities with automotive customer using our touch solution in entertainment systems. We are in discussions of pre-design activities with several automotive Tier 1s, all current customers familiar with our technology who are looking for cost advantages and new functionality, both of which the recent technology update provides. In addition, we see growth from automotive Tier 1 customers supplying to, among others, Volvo and Suzuki, who continue to release new car models using our touch solution. Since 2015, there have been 4 million cars shipped with our technology. I also would like to take the opportunity to update you on customer activities we discussed last quarter. We have been selected by an industry-leading medical device OEM, who will use our sensor module in a retrofit touch display system for an x-ray machine. This is a relatively low-volume product but with a high ASP. This is an important first step to show our capabilities in the medical space. The solution is in final test phase before production. Chigoo is now on production with their smart interactive airport luggage trolley and plans to ship 300,000 units over the next 3 to 4 years. They have begun initial shipments in limited numbers. An automotive Tier 1 supplier has selected our sensor module as the touch interact -- interface for a new taxi meter system to be used primarily in the European market. This customer has come into initial limited production for the first test market. A large global U.S. OEM has selected our sensor module as the touch user interface for an FAA-approved retrofit and U.S. aircraft instrumentation panel. Initial product run quantities have been released to the FAA for certification. The product cannot go into full production until FAA certification is complete, however, the timing of this is still unknown. And last but not least, we are currently engaged in design discussions with several OEMs for our automotive entry systems, primarily tailgate solutions. As you all know, automotive projects can delay and be quite complex, but it is encouraging that we are not only on their radar but have moved to active discussions. And we have been awarded the design win for a door collision sensor detection system by a U.S. electric vehicle auto OEM. The project is in early stages and is expected to take a few years before it comes to market. On a final note, Digi-Key, our distributor, has sold over 500 sensor module evaluation and development kits to over 140 buyers that range from individuals, but also to large global corporations. These shipments provide a good foundation for further sales activities. So Lars, now over to you.

Thanks, Hakan. You can find our full year 2018 10-K and earnings release available for download from the Investors section of our website, Neonode.com. You can also find a slide deck that we present today available from the same place. I'm going to start by giving you a summarized view of our full year 2018 revenues and results. Our total revenues for the year ended December 31, 2018, decreased by 17% year-over-year. The decrease was 8%, excluding non-core revenues at AirBar and NREs. Our total license fees decreased by 8%, mainly related to e-readers and automotive. I'm going to talk about the license fees in more details on the next slide. AirBar sales decreased with $640,000 due to a decision to move all our focus from AirBar to B2B sales. Sales of sensor modules to B2B-embedded customers increased by 85% year-over-year. Although not a huge dollar increase, but this is an encouraging sign that we expect to see continued increase in B2B sensor module sales as we focus our sales effort on our selected markets. Revenue generated from NRE design activities decreased by $300,000 because of completion of a key milestone for the steering wheel project with Autoliv in 2017. NRE revenues typically fluctuate between the comparable reporting periods due to number and price of projects completed. Our operating expenses for the year was down from $13.4 million in 2017 to $11.5 million in 2018, a reduction of 14% and is well on plan. Our net loss was $3.1 million or $0.52 per share in 2018 compared to $4.7 million or $0.89 per share in 2017. Please be aware that our results going forward may have a material impact from the exchange rate variance between U.S. dollar and Swedish kronor. Our total license fee revenues decreased by 8% year-over-year. Printer licenses increased by 3% year-over-year compared to last year. The increase was 23%, excluding Canon, where we, as expected, see continued reduction while they are moving on to an alternative platform, which has been made because of a design preference. This bears a 43% revenue growth in the fourth quarter compared to the third quarter 2018 from all customers, except Canon. And we do expect a continued growth from HP, Lexmark and Epson going forward. Our automotive license business had been decreasing during the 3 first quarters during 2018, but with a turnaround in the fourth quarter, resulting in the full year decrease of 24% year-over-year. However, automotive license fee revenues increased by 4% in the fourth quarter 2018 compared to the same quarter 2017 and increased 91% compared to the third quarter 2018. Historically, the automotive market in China has been the dominating part of our automotive license fee revenues, which for the full year declined by 74% year-over-year, and which we now try to regain. It is, however, encouraging to see that Volvo released new car models with over 140% increase of license fee revenues year-over-year. Suzuki has deployed a technology in all car models that include touchscreens such as Vitara, Swift, S-CROSS and Ignis and continue to grow license fees. Revenues from our Tier 1s that supply infotainment system to Volvo, Suzuki, increased by 10% year-over-year. The automotive market in China has experienced some headwind also in the fourth quarter due to the economic impact of tariffs and reduction of the overall economy, which has negatively impacted the numbers of cars sold. The Chinese government has recently floated some tax reduction ideas as a way to reenergize the automotive market. Licensing revenues have also, as I mentioned before, been affected by the strategic decision the company made in early 2016 for a shift from selling license agreements to focus on selling sensor modules only. We are now reengaging with all our current customers and new license fee customers, and I believe this, together with the work we are doing -- with the new release of our touch display license solution will provide abolity to grow future license fees revenues. Our license customers shipped 11.4 million products during 2018 and accumulated more than 67 million products shipped since 2011. I'm going to end by talking about the balance sheet and cash position. Our cash used by operations for the full year 2018 include: from $5.6 million in 2017 to $2.9 million in 2018. As of December 31, 2018, we had $6.6 million in cash and $1.8 million in accounts receivables. On October 1, we did a 10-to-1 reverse stock split, and on October 15, 2018, we regained compliance with enough capital market minimum via the price requirements. On December, Neonode sold $2.9 million -- 2.9 million shares in the product placement of newly issued common stock at the price of $1.60 per share, which strengthened our cash balance to $4.7 million. The purchases in this private placement included Neonode Directors Ulf Rosberg and Andreas Bunge and members of the management, including CEO and CFO. Now I would like to turn the call back to Hakan.

Okay, Lars, and thank you very much. Before I turn the call over for questions, I want to finish with my outlook on the business. We do have a strong and versatile product offering covering several use cases and segments. We are focusing our efforts on markets where we have a distinct advantage in cost and or function and see distinct growth opportunities, touchscreen solutions with existing customers for our licensing business, high-end display touch and ruggedized touch solutions across industries and automated -- automatic tailgate opening for automotive. We continue to see a strong interest for our solutions and are in a number of discussions for both our license and module business as mentioned. We have a targeted sales approach and will increase our sales reach by using partners of various kinds, increasing the number of customer opportunities. We will continue to increase our marketing efforts to showcase the capabilities of our technologies to create awareness and market pull. We will continue to evolve our technology to stay competitive from both the use case and the cost perspective. In short, my confidence is very high, that we are on the right track to grow the business and get profitability. So now with that, I will hand over the call to the moderator for questions.

[Operator Instructions] And we do have a response from Viktor Westman with Redeye. Please go ahead.

Hi. Thank you. A couple of questions. First, I want to get your perspective on -- if you could give the earnings for the traditional license partner. If you could separate that from the new module part going forward in your reports. Is that something you're thinking of doing? Because I think that would show the stock market that there's a lot of hidden values in your license contracts.

Yes. Hi, Viktor, Lars here. Yes, that's something we consider to do while it would -- may be true or increase the transparency of a licensed business versus investment newbies, so to say. I mean, we should all know that the licensing business is with 100% gross margin and an operating margin of over 60%. But this has not been decided to do that yet.

Yes, okay. Okay, second question on the Digi-Key

Viktor? This is Dave. I believe we already do that on the income statement. We have the license fees and then we have sensor modules, and then we have the NRE and then on -- across the business breaking out the same way, right?

Okay. But is that -- isn't that for gross profit?

Yes, that is. That's -- that stands for our gross margin, right. But the license, you said to break out the license fees separately, and they are broken out separately on the income statement.

I mean, for the earnings, sorry.

Okay, okay, okay, I got you. Okay.

That was the third. Something for you, maybe, to think about. I've got another question on Digi-Key, if I may. Okay, so the evaluation kits, you mention 500 sold there. Is that since launch? Or is that for 1 year? Or what's the time for those 500?

I would say that is during this year.

Okay, okay. Great. I'm going to ask last question also, if I may, on these new models for licenses in all-time printers and other stuff. I just wanted to ask, is this mostly replacement of old similar models? Or are those entirely new models, so to say, that will be the key incremental increase for you?

Yes. I mean, this is new design projects that we are involved with. So that is for both printers and e-readers and monitors. And what I said about e-readers, some of them lost cost during course of action due to the fact that we, so to say, decided not to do the license business. But now we are engaging forcefully. And also, with the new release of our licensed technology, we've done a lot of improvements to it and thus they're coming back to us.

Yes, okay. Good. But my question was more on the cannibalization of the new models. And are those models that are new models competing with the old models? Maybe that's a better way of putting it. Because I mean, when you get the new contract with new car models, sometimes it can be refreshed car models, so to say. And then just wanted to ask about that, if that's mostly the -- your new contract, the joint discussion if that's renewed models. So is it entirely new models that you did not participate in before? If you understand better now.

Yes, yes. I think I understand the question and that is actually a combination. Some -- within the automotive space is basically you -- as you say refreshed, but there are also the ones coming back to us on the basis of the newer things that we have made. And similarly, within the printer business, I would say that, obviously, these guys are always, so to say, bringing new models out into play, and then -- and those are the new things that we are discussing with them. And then when they kill the old ones, it's hard to say, so they're probably with some sort of a transition phase.

Okay. Thank you very much, guys. And best of luck also to you Lars in the future. I hope to see you in the Neonode board. Thank you.

Thank you very much.

The next question is from John Nelson, individual stockholder.

Hi. I wondered if you could give us some estimates as far as the timetable for decision-making or decision on the things like the liftgate and door sensors by some of the automotive companies that you were pitching your product to.

Yes, it's very hard to give exact time estimates. I mean, that is, as we say, it is a lengthy process to work through from design, from proof of concept to design inclusion to hold the test and verifications that needs to be made in order for the final decision to be there. So when we are looking at these types of implementations, they are all more than 1-year type of projects in order to get to the point where they'll be entering to mass production. I will say with the automotive industry, generally speaking, it's probably between 1.5 up to 3 years, depending on the complexity of the solution.

Okay. And the -- also, could you just give us a little bit of discussion about the steering wheel opportunity and the -- when the soonest of any potential customers would be able to utilize it on their models?

Yes, also a hard question because it's very much tied to the overall automotive driving experience, when is that going to happen and when is that going to be forced through. But obviously, we are working with our partners, who actually are the ones who go to market with these products, and we try to supply them the best way we can with our technology in order to make it happen. But giving any forecast as to when is very difficult because that, we are not in control of.

Okay. And from your automotive customer, is there any significant difference in the amount of interest in steering wheels versus the liftgates versus door sensors? Is there a -- the number of customers interested in particular products at this time or testing your products in these utilizations very different in any way? Or are they all pretty -- I mean, pretty much uniform?

Yes. I mean, from our perspective, and that is also why we have decided to focus on automated entry systems, is that that is an area where we see some traction and the greatest interest at this point. It's relatively close type of application areas to be implemented. And we already now -- I mean, we see automated tailgate opening in the marketplace. But as we see, there are some deficiencies with the present solution, why we -- and we know that our technology fits very well with these type of applications, and that is why we have decided this is -- that's where we're going to put better focus at this time because it's the shortest possible way of taking time to market basically, where we, under this scenario, where we can really make a difference.

Okay. And then, are there any other significant areas of usage for your types of sensors other than, say, automotive and aircraft that is potentially rail or building doors, windows for either access type of the secure access or convenience?

Yes. I mean, I would say there is a problem of abundance here. There are so many use cases where our technologies could fit. But what we have decided to do is to focus on some core use cases where we know that we can make major traction. That's why we have chosen to advertise display, for instance, which is across industry type of application, can be used in any type of display situation. And that is also where we increased our sales reach through partners, enabling them to sell this medical display system. There's a great interest and niche for us, and then the entry systems within automotive. So we have no problem in finding potential use case areas. I think the question here is very much more to focus on something where we can put some real effort behind it and actually get some serious traction because it shouldn't stop just with pure speculation and discussion about potentials. It should be really hard down into the details of actually supplying something of value here and now. And that is the way we can get to market and get faster time to revenue basically.

Okay. Thank you. I'll pass on.

And our next question is from David Loft, private investor.

I just had a question about the tailgate and the door entries. As far as competition, are you kind of in a niche market there where -- or do you -- are there competitors that would -- buying up similar to what you have?

I mean, they're already people who supply in this space. I want you to be aware of that. But -- and -- but that -- those solutions, as we understand it from the discussions we had with our customers, have deficiencies which they would like to iron out, and that's how technology provides an alternative to what is and bring traditional value in terms of usability. And that space is for why we have decided to focus on this and it is already -- so to say if there is already no need, it's already in the marketplace and we can make a difference, that's where we're going to head initially. But then there are obviously a lot of other types of areas which are very closely related to tailgate opening, that is, for instance, pinch protection, object detection, not slamming the door or the trunk when you're opening it and so forth. And that are natural progressions that we see we can rather quickly when we first go into discussions about this [indiscernible] type of solution.

Thank you very much.

Thank you.

At this time, there are no further questions.

We want to thank you all for joining us on our call today and have a good day. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.